NXP Semiconductors not out of the woods yet, despite UBS upgrade

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By Sam Boughedda

NXP Semiconductors (NASDAQ:NXPI) was upgraded to Neutral from Sell, with its price target raised to $167 from $160 at UBS on Tuesday.

Analysts did, however, state that the company is not yet out of the woods despite most of its downside risk being "mostly priced in."

They wrote that the stock's performance (down around 30%) in the past 12 months was based on fears mainly around the macro impact on automotive demand. However, UBS has upgraded the stock based on three factors.

Firstly, the fact it has "best-in-class free cash flow management: NXP's FCF showed strong outperformance relative to its peer average since 2012, and we expect this trend to continue through the next three years with an NXP FCF margin of 27%, vs a peer average of 24%. We would expect NXP cash flow management to be strong in a downturn due to its good track record," said the analysts.

Secondly, they pointed to its margin protection due to its largely capex light/outsourcing strategy, with the firm believing "margins could be more resilient due to fewer fixed costs than, for example, IFX/STM."

Finally, the analysts explained that if they apply a three-year reverse DCF, they note that the current share price implies a 6-7% revenue growth CAGR 2022-25E, with an EBIT margin of 20% to perpetuity.